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OPINION AND ANALYSIS | 28-04-2023 11:29

Edward Porter: What Xi Jinping wants in Latin America

China is not interested in turbocharging the region’s industrial development. But neither are its investments seeking to challenge the United States.

How worried should Washington be about China’s growing footprint in Latin America?

The new crop of left-leaning governments in the region are keen on it growing further, excited about the prospect that the Asian giant could provide a viable economic development path, one which offers the extra attraction of bypassing their old nemesis, the United States. “What Brazil wants to propose to China is that we need to build a hundred things,” President Luiz Inácio Lula da Silva said as he arrived in China last month. As Brazil’s Finance Minister Fernando Haddad put it, the goal is to “reindustrialise Brazil in partnership with Chinese capital.” 

Chinese activity in the region is changing. The narrow focus on gaining access to South America’s vast natural resources, which guided its investments during the first decade and a half of the century, has broadened into a portfolio that includes ventures in renewable energy generation, telecommunications, power distribution and even ride-sharing. The US national security apparatus is definitely getting antsy. As Army General Laura Richardson, the head of US Southern Command, put it in congressional testimony last month, China’s inroads amount to “a strategic risk that we can’t accept or ignore.”

And yet the pattern of Chinese activity across Latin America suggests that both of these scenarios are a bit overwrought. Xi Jinping has no reason to reindustrialise Brazil. And China’s myriad investments in Latin America are still relatively small, and way too scattered, to justify fears of a hostile behemoth breathing down the United States’ neck from across the southern border. As David Dollar, a former China expert at the World Bank and the US Treasury who is now at the Brookings Institution, put it, “it is a misunderstanding to think that there is a China Inc directing investment decisions.”

What does China want for its money? Enrique Dussel Peters, coordinator of the Chinese investment database compiled by the Academic Network for Latin America and the Caribbean on China, points to a clear shift in geographic and sectoral composition.

The share of investment in raw materials has been steadily declining, from about 95 percent in the five years from 2005 to 2009, to just over 41 percent over the last three. China is still interested in energy, but it no longer focuses just on fossil fuels — with more and more money moving into solar and wind generation. Investments in local services — from Lima’s electricity grid to the Club Med in Santo Domingo — have surged from just over one percent of total investment in the 2005-2009 period to just under 35 percent in 2020-2022.

As the industrial focus changed, the regional footprint of Chinese capital has shifted, too. In the first five years of the century, Brazil drew some 77 percent of all Chinese direct investment into Latin America and the Caribbean. Last year it pulled only 47.5 percent. Mexico’s share, meanwhile, jumped from 11 percent to 21 percent. Argentina’s went from next to nothing to 26 percent.

It is natural for the Chinese money to generate excitement, especially seen against a backdrop of US companies like Ford leaving Brazil and Sempra Energy leaving Peru. China’s net direct investment in Latin America has outstripped that from the United States in the last few years. It has become South America’s biggest export market by far. “We are in another potential boom era,” notes Cynthia Sanborn from the Center for China and Asia-Pacific Studies at the Universidad del Pacífico in Peru. “The global energy transition is going on and Latin America is a site for a lot of strategic minerals.”

In March, Honduras ditched Taiwan to establish diplomatic relations with the mainland. In Paraguay, the last South American country that keeps an embassy in Taipei, the leading opposition candidate Efraín Herrrera has said he would make the switch too if he wins on Sunday. Last year, President Alberto Fernández signed Argentina onto China’s Belt and Road Initiative, joining 20 other Latin American countries in exchange for US$23.7 billion in anticipated China projects and investments.

And yet, the story doesn’t fit Brasilia’s dreams nor Washington’s fears. “China’s direct investment does not necessarily seek industrialising Latin America, it seeks access to raw materials,” said Dussel Peters. “But transactions over the last few years show an increasing orientation towards domestic markets.” The old logic for Chinese investment — purchase mines for the minerals, and ports and railways to ship them out — now works alongside another motivation: to find new, less developed markets in which to grow. That applies as much to Didi moving into Mexico, Colombia and Brazil as to China Yangtze Power Co’s purchase of much of Lima’s power grid from Sempra. 

What about industrial development? Mexico has benefited a bit from investments by Chinese manufacturers trying to get around new US tariff barriers against Chinese products. But other than that, there is precious little evidence: Less than 20 percent of Chinese investment in the region over the last three years went into manufacturing. 

For sure, the world’s largest producer of lithium ion batteries is likely to be extremely interested in exploiting Latin America’s vast deposits of lithium. Yet some distance lies between this and the aspiration for an industrial renaissance riding on the back of Chinese money. 

Earlier this year Argentina’s Fernández told Chinese TV that “every time I speak with a Chinese investor I insist that if we are going to exploit lithium, we transform the lithium into batteries and export the batteries and not the raw lithium.” Yet while Chinese investors have poured billions into lithium mining projects in Argentina since 2018, so far there are no lithium-ion battery investments.

Fernandez’s dream doesn’t match up well with Beijing’s “Made in China 2025” strategy to enhance its advanced manufacturing. Both he and Lula, might recall the giddy days earlier this century, when China’s appetite for commodities helped propel a good decade of fast economic growth across South America. Even before China slowed and South American economies tanked, a fear took hold that the embrace of Asia’s manufacturing powerhouse was deindustrialising their economies, undercutting their industrial base while stoking demand for their raw materials.

Washington, meanwhile, might want to re-evaluate the fear with which it reacts to every Chinese move. Evan Ellis, who teaches Latin American Studies at the US Army War College Strategic Studies Institute, suggests that over the last 20 years China has pursued one objective in Latin America: the ability to promote its own prosperity.

That would encompass everything from ensuring access to food for its people and natural resources for its industrial development, to finding markets in which to capture value-added for Chinese firms, to perhaps even buying goodwill and shaping political systems in the region to ensure nobody stands in the way as China pursues its goals.

True, public companies account for some 70 percent of Chinese direct investment in Latin America. One could justify a story about the Chinese state moving in on the region. But the diversity of sectors and individual actors — Huawei but also the rideshare giant Didi — suggests the argument that China is building up a strategic arsenal of investments south of the border is somewhat overwrought. “There is a lot of competition between different Chinese bureaucracies and public companies,” Dollar said. “I don’t think there is a master plan.”

by Eduardo Porter, Bloomberg

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